Fitch at ease with banks

Australia’s banks face more bad debts and growing pressure on profits as the strong dollar and low consumer confidence lead to higher unemployment, a credit ratings agency has warned.

But it assures investors the banks will remain “among the most profitable in the world", saying they have adequate buffers to absorb losses.

Fitch Ratings predicts the operating environment for Australia’s banks will be “softer" in 2013 but says it does not expect the AA- ratings of the big four to be affected. It says it forecasts “a healthy economic picture in Australia during 2013, although some segments are being affected by the strength of the Australian dollar and/or modest consumer confidence," and “unemployment will probably rise as a consequence".

The report was the second in a week by a ratings agency on local banks after Standard & Poor’s said the outlook for the sector was “stable" but warned that ratings downgrades could ensue if global economic conditions deteriorated significantly.

Fitch says a major downturn in China, which would hit miners hard, was the biggest risk to the Australian economy and would have negative flow-on effects for banks.

“A hard landing in China appears the most likely trigger for a sharp slowdown in Australia, although this is not Fitch’s base case," it said. “This would initially be felt in the mining sector, but Australian bank exposure to the sector is limited; any impact on asset quality from a sharp mining slowdown is most likely to be felt through the banks’ broader commercial lending portfolios."

In a separate report on Monday, Moody’s Investors Service found that the proportion of home loan borrowers at least 30 days behind on their mortgage repayments rose to 1.44 per cent in December 2012, up from 1.3 per cent in November. The agency said it expected bad debts to be “stable" over 2013.

Despite the concerns of some ratings agencies, Australia’s major banks have made a largely positive start to the 2013 financial year. Commonwealth Bank of Australia reported a record $3.78 billion half-year profit and National Australia Bank and ANZ increased their first-quarter profits by 4 per cent and 6 per cent respectively.

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Fitch said sectors such as retail, construction and manufacturing were being hurt by the high Australian dollar and weak consumer confidence, while the mining investment boom was “nearing" its peak which was fanning concerns about higher bad debts in the commercial sector. While bad debts could rise, Fitch said these would be “easily absorbed" by the banks.

“Australian banks are among the most profitable in the world and are likely to remain so," it said.